The Returns On Capital At Hap Seng Plantations Holdings Berhad (KLSE:HSPLANT) Don't Inspire Confidence

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Hap Seng Plantations Holdings Berhad (KLSE:HSPLANT), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Hap Seng Plantations Holdings Berhad, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.039 = RM82m ÷ (RM2.2b - RM63m) (Based on the trailing twelve months to September 2020).

Therefore, Hap Seng Plantations Holdings Berhad has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.8%.

View our latest analysis for Hap Seng Plantations Holdings Berhad

Above you can see how the current ROCE for Hap Seng Plantations Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

There is reason to be cautious about Hap Seng Plantations Holdings Berhad, given the returns are trending downwards. About five years ago, returns on capital were 6.2%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Hap Seng Plantations Holdings Berhad to turn into a multi-bagger.

The Bottom Line On Hap Seng Plantations Holdings Berhad's ROCE

In summary, it's unfortunate that Hap Seng Plantations Holdings Berhad is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 14% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Hap Seng Plantations Holdings Berhad we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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